Positive Response Indonesian Stocks & Rupiah to Fed's Rate Hike
In line with expectations, the US Federal Reserve decided to raise its benchmark interest rate by 25 basis points to the range of 2.00 - 2.25 percent at the September policy meeting that was concluded on Wednesday 26 September 2018. It is the Fed's eight rate hike since 2015 and the third one so far in 2018.
As a result of the hike, US bond yields fell. The ten-year US treasury yields declined more than 5 basis points to 3.048 percent as market participants had been braced for a more hawkish stance from the Fed. Lower ten-year US treasuries yields are good news for Asian emerging markets, such as Indonesia, as higher yields encourage outflows from emerging markets back to the USA.
The Federal Reserve noted in a statement, released overnight, that the existing conditions in the labor market and inflation near the Committee's symmetric two percent objective over the medium term allowed the Fed to make this rate hike decision. The Fed also reaffirmed its outlook for further gradual rate hikes will into 2019, thus further flagging the end of accommodative monetary policy.
Analysts expect to see one more rate hike in 2018 in the world's top economy, followed by three rate hikes in 2019 and three in 2020. Meanwhile, the Federal Reserve said it expects US economic growth to touch 3.1 percent year-on-year (y/y) in 2018 (up from an earlier expectation of 2.8 percent y/y), before easing to 2.5 percent (y/y) in 2019 and 2 percent (y/y) in 2020.
In the latest statement the Fed also noted that "risks to the US economic outlook appear roughly balanced", implying that it is not too worried at this moment about the ongoing trade war between the USA and China as well as Republican tax cuts that could cause the economy to overheat (these topics were not mentioned in the statement).
Asian markets responded mixed on Thursday morning (27/09) after the anticipated US Federal Reserve rate increase. Indonesia's benchmark Jakarta Composite Index, however, performed well, rising 0.68 percent in the first trading session, showing that risk appetite somewhat returned. Moreover, it is widely assumed that Bank Indonesia will raise its benchmark rate by 25 basis points accordingly (to 5.75 percent) later today when the Indonesian central banks concludes its September policy meeting. The Indonesian rupiah is currently hovering near IDR 14,900 per US dollar.
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